This week many of you will receive tax rebate checks from the I.R.S. Yes, that $600 you are receiving is meant to help kick start the economy.
The government tried the same thing in 2001, sending out $300 checks. But this time, there’s a difference — not all of us are getting a check. In fact, those earning six figures or more won’t be seeing any check this week.
So that got me to thinking about how fair the tax system really is. Do the well-off pay their fair share, or do they also deserve a tax break?
Well, let’s start with the ultra-rich. Bajillionaire Warren Buffett has argued that he isn’t being asked to pay his share. He went around his office, asking people what share of their income they pay in income taxes. Buffett’s 17.7 percent tax rate compared a bit too favorably with the 30 percent tax rate paid by his secretary.
So it appears that the tax system favors the super-rich over working stiffs.
And Buffett went a step further, putting his money where his mouth is. Last November he issued a challenge to his fellow billionaires:
I’ll bet a million dollars against any member of the Forbes 400 who challenges me that the average (federal tax rate including income and payroll taxes) for the Forbes 400 will be less than the average of their receptionists.
So far, no-one has taken him up on this bet.
What about those of us who are merely among the well-off, and not in the Buffett-stratosphere?
Now, I’m no Warren Buffett (believe me!), but I’ve just finished figuring out my federal taxes for the year. I live comfortably (one of the virtues of teaching in a business school), but was dismayed to learn that my federal taxes for 2007 amount to only 16 percent of my income.
This strikes me as astonishingly low. And it’s not like I have a fancy approach to tax minimization; I just write off a bunch of business-related expenses, and benefit enormously from deductions for mortgage interest and charitable giving. Obviously city and state taxes drive my total tax bill up a bit further, as do payroll taxes, although I plan on getting some of that back as social security in my old age.
But the point remains: I had never quite realized that the Warren Buffett problem extends far enough down the income distribution that even folks like myself aren’t paying their fair share.
So I repeated Warren Buffett’s experiment here at Wharton. And it appears that I’m paying lower taxes than the administrative staff in my department. And if it is true here, I suspect the same goes equally for most folks in the top 10 percent of income earners. (Incidentally, according to Piketty and Saez, around half of all income in the U.S. goes to those of us in the top decile — roughly anyone with a family income of six figures or more.)
Warren Buffett’s approach to casual empiricism is quite instructive. He just took a survey around the office of people’s average tax rates, finding that he paid the lowest share. Here’s a thought:
Why not run a similar survey in your own office, or among your circle of friends? It will be interesting to learn the extent to which Warren Buffett’s findings generalize.
Please post your findings in the comments.
and 
. You can also watch it on 
Warren Buffet is able to reduce his tax rate by receiving the majority of his income in the form of dividends (taxable at the 15% rate).
I’ve always wondered what is the economic rationale in the US for allowing Income Deductions due to Mortgage Interest (on a primary home) when there is no corresponding deduction for Renters?
I think its a particularly USA-centric deduction.
It is to incentivize home ownership. Renters have no “sense of ownership” or equity in the property they are occupying, thus, they really don’t care what happens to it. I think the idea is that society being pleasant and home ownership in an area share a direct relationship.
Grad student readers may throw this off.
I grossed 17,548.09 last year. I paid 2,382.00 in federal taxes and 1650.27 in state taxes. Combined percentage of my income that went to those two taxes: 22.97%. This does not include any Social Security withholdings or Medicare. I have a small mortgage to deduct. No children, thankfully. I am hating my liberal arts degree (top of my class) and wishing I was at least Warren Buffet’s secretary
If you grossed $17,548.09, then, assuming you are single, you could use the standard deduction of $5,350 (for 2007), and an exemption amount of $3,400 (again for 2007), which would bring your taxable income down to $8,798.09. The tax amount on that taxable income (per the 2007 tax tables) is $925 (which would make your tax rate a little over 5% – if you want to add the payroll tax of 7.65%, that would get you up to almost 13%). I don’t know what state you live in, but you might want to re-run those numbers as well, considering how far off you were in your federal calculations. I mean, even if you didn’t take either your standard deduction or your exemption amounts, according to the 2007 tax tables, you still should only have paid $2,283 – a hundred dollars less than you claim in your post.
To follow up on what Taxcpa said based upon $17,548 if you made say a $2000 contribution to your own retirement fund say $800 to a traditional IRA and $1200 to a Roth IRA then your line 38 income would be just under $16,750(as you can deduct the traditional IRA amount) and qualify you for a $1000 tax credit(.5 times $2000) . Since you only owed $925, that is all you would get in credit (cannot wxceed your tax liability) but this means that you would pay NO federal income taxes. I understand that on low income you might have trouble contributing to your retirement fund but since you can take the contributed money (not the interest) out of a roth IRA without penalty you could take $1200 back out – yes that means that not only do you have $800 in a traditional IRA growing tax free but you actually have about $125 more than you would have had if you had done nothing. – but you still get to vote on how the money the rest of us provide gets spent.
Additionally if you had student loan interest, health savings account , moving expenses or any of several other areas to deduct from your gross income to get your adjusted gross income below $13,460 you would qualify for earned income tax credit of about $450. Of course this would reduce your initial tax liability so you would get less back from having contributed to your own retirement fund. Is this a great country or what. Earn money, pay no taxes, get money back and still get to vote just like you were a contributing member of society.
Oh, you do pay SS tax but again since you are on the low earning end statistically you will get back far far far more than you ever put into the system. This is unlike the high earners who because of the the way SS payouts are set up will likely never get anywhere close to the amount back that they put in. Guess some times it just does not pay to go to school in something hard in order to qualify for and get a high paying job.
What Republicans are great at is giving the little guy the $1000 tax cut while given the big buy the $1,000,000 tax cut and after listening to the Right Wing Noise Machine (Limbaugh, Hannity, etc) the little guy goes “That’s sounds fair”.
“But the point remains: I had never quite realized that the Warren Buffett problem extends far enough down the income distribution that even folks like myself aren’t paying their fair share.”
Can I ask – what do you believe is a “fair share”? I think that’s the important issue!
Social Security has a higher payback rate the lower your income is, so I think it is unfair to call it a tax & act like it is regressive.
Either it is worthwile, in which case it is actually progressive in its payouts. Or, it is a big fat rip-off, and we should be advocating for its demise.
Pick one or the other. But, acting like it’s a regressive tax is having it both ways.
I agree. If Social Security payouts are limited (they are) then it just makes sense to limit the tax base for it.
Also, it conflates federal income tax policy with Social Security reform.
When people say, “You get that SS back when you are old” they imply that a tax payer receives no benefit from the other taxes he or she pays.
Buffett probably pays more taxes than the average person, although not directly. The corporations that he owns stock in pay taxes at a high rate. If these corps did have to pay taxes to the government, they could pay Buffett higher dividends or generate more capital gains for him. Thus, Buffett is taxed (indirectly) via the corps that he invests in.